SAN FRANCISCO -- Following is a commencement address that the more than 1 million members of the Class of 2004 aren't likely to hear _ but should:
Friends: Over the past four years, and in some cases longer, you have diligently pursued the quality education that these hallowed halls of learning afford. Graduates, we salute your achievement. We owe you a debt of gratitude.
You, however, owe a much greater debt. I'm not talking about paying back to society. That's why we have taxes. I mean paying tuition, credit card and other financial bills you've amassed -- and keeping future expenses in check, not in an open checkbook.
To be sure, you've learned a lot about many things. But one test you probably won't ace is the finance quiz. Personal finance, that is.
We're all part of a consumer culture. We're encouraged to spend. Young people like you, flush with what's innocuously called "disposable" income, are special targets for advertisers, credit-card companies and others focused on separating you from your money.
DON'T BUY IN
Rule No. 1 of personal finance is that money is not a throwaway, a discard, a disposable or anything of the sort. Enjoy the money you make, certainly. Use money to make your life easier, but don't abuse it. Pay your debts on schedule. Though financial planning wasn't part of your core curriculum, pocketing a few money tips now may keep you from digging deeply into your own pocket later.
PAY YOURSELF FIRST
Invest in yourself. A spending spree is tempting, but earmark a certain percentage of your salary each month to a savings account. It doesn't have to be much -- even $10 a week can make a huge difference over time. Just make sure the money is deducted automatically from your paycheck.
"Put savings aside before you start doing anything else," says investment adviser Deena Katz of Evensky Brown & Katz. "I caution people about starting a new job and buying lots of new things. You don't know if that new job is going to work out, and you don't want to overload yourself with expenses."
Use this account for short-term savings that ultimately will build an emergency, or discretionary, fund. The "emergency" might be a security deposit on your next apartment or a down payment on a car.
Put this money into a short-term bond fund or a money-market fund, which offer greater liquidity than a certificate of deposit and a higher yield than an ordinary bank savings account.
Stocks don't belong here. "Anything you can't keep in the market for at least five years, you need to have in some kind of fixed-income account," Katz says.
FUND A 401(K) RETIREMENT PLAN
Retirement? You're just ready to start working. Retirement is 40 years -- a lifetime -- away.
Exactly the point. Start contributing to an employer-sponsored 401(k) now, and you can use "comfortable" and "retirement" in the same sentence years later.
"When you get an early start and your money has an extra 10 or 20 years to compound, it can really grow dramatically," says Kevin Ellman, an investment adviser with Sagemark Consulting.
Here's a good example:
A 21-year-old contributes $30 a week to a 401(k) plan for 14 years. Then she never adds another dime, leaving the money invested in the program for another 30 years. Assuming a 7.4 percent annual rate of return -- relying heavily on stocks or equity mutual funds to achieve that goal -- the account would be worth $308,000 at retirement.
Contrast this strategy with someone who waits until 35 to start funding her 401(k) plan, also at $30 a week but for the next 30 years. At the same rate of return, the account would be worth $158,000.
Moreover, the early starter contributed a total of about $22,000 over 14 years, while the 30-year dole required almost $47,000 out of pocket.
"If they start to save now, they'll have to save less over their lifetime than if they wait," says Sheila Wales, a vice president at Transamerica Retirement Services, which calculated the above example.
And if it's hard for you to start early, she adds, "try saving when they're paying for college for their own kids and taking care of parents."
Most of you are all too familiar with credit cards _ and the almost criminal interest rates they charge.
"Credit-card companies are happy to let you start spending money," Ellman says. "All of a sudden you're saddled with high interest and high payments, and you're stuck. It's very hard to get out from under."
By all means, get a credit card. But carry only one card with the lowest possible annual percentage rate you can negotiate. Pay off your bills in full and on time -- late fees are onerous too.
This way, you establish credit -- and credibility as a borrower.
"You're not carrying credit, but you have credit," Katz explains. "When you buy a house or a car, if you already have established credit, it's a whole lot easier for you."
BUY RENTERS' INSURANCE
Maybe that Phish poster is priceless because it was the first concert you went to without your parents chaperoning. Trey Anastasio may look good in the living room of your apartment, but so do your stereo and television and iPod _ to thieves.
Renters' insurance is protection worth having. Premiums don't usually cost much -- averaging $10 to $12 a month for $30,000 in property coverage and $100,000 in liability coverage. Replacing belongings due to burglary or fire, or being sued if a party gets out of hand, could set you back a lot more.
"You can go broke by not spending money on insurance where you should," Katz says.
BUY DISABILITY INSURANCE
Younger people without dependents don't really need life insurance, but disability insurance is another matter. Your greatest asset is being able to earn a living. What if that disappears?
"If you can't work, how are you going to pay your bills?" Katz asks. "I guess you could go home to Mom and Dad."
Since getting away from Mom and Dad has been a full-time pursuit for many of you, that option might not be so attractive. Employers frequently offer disability insurance at a discounted rate. If yours is one of them, take advantage of the opportunity.
SAVE ON COMMUTING COSTS
If you use public transportation or drive to work, employer-sponsored commuter benefits can smooth the ride.
These plans allow monthly deductions of up to $100 in pretax earnings to pay for mass transit and up to $195 for parking at work. Employees in a 30 percent tax bracket, for instance, can save roughly $350 a year on mass transit and more than $700 on parking.
USE FLEXIBLE SPENDING ACCOUNTS
Many employers also offer flexible spending reimbursement plans for health-related costs that aren't covered by standard medical insurance. This can save you 30 cents on every dollar spent on out-of-pocket medical costs, including dental and eye care, chiropractors, psychotherapy, alternative health, birth control and over-the-counter medications.
Like commuter plans, flex-spending programs use pretax earnings and have a maximum dollar limit. Be careful, though. If, for example, you budget $1,000 in annual health expenses, you must use it all within 12 months or lose any money left over.
"It's foolish not to take advantage of the savings plans offered," says Jon Kessler, chairman of WageWorks, which administers these programs for employers. Yet 20-somethings are least likely to participate in these plans. "This is saving money on stuff you're going to buy anyway," he adds.
TOSS YOUR ATM CARD
ATM cards are keys to a cash machine, and that's dangerous.
"Anything you can turn into cash flies out of your pocket," says Katz, the financial adviser.
Use a debit card instead, taking money from your checking account as needed.
"It's just like a credit card, but you pay for it immediately," Katz says.
Tap your savings account only for incidental expenses. "You won't know where the money went if you turn it into cash," Katz warns.
And even though some debit cards carry a monthly fee, she adds, "Better you pay a small fee than let cash blow through your fingers."
KEEP TO A BUDGET
Cover your monthly bills, fund the emergency account and the retirement plan and then you can decide how to spend any money that's left over.
"A lot of college graduates get a job, and it's the most money they've ever made," Katz says. "They feel unbelievably rich. You can't live in the immediate now. You need to make sure you have some kind of budget."
"Save first and spend what's left," Ellman adds. "It's kind of basic, but it works."
All you need to know about finance you didn't learn in kindergarten _ or college, for that matter. To be honest, most parents don't know that much about personal finance themselves. Become educated about money, and many of your money problems will be solved.
So go forth and prosper, graduates. And remember, the money you save is wealth you can bequeath one day to your dear alma mater.
This is not a commitment for a loan or an ad for credit as defined by paragraph 226.24 of regulation Z.